Workers’ Comp via Employee Leasing: Contractor's Time bomb?

Ever since the adoption of the Tax Equity and Fiscal Responsibility Act of 1982, PEO s and employee leasing arrangements have grown dramatically. It is estimated that some 3 million employees are working under such an arrangement. For many industries leaving all the employment issues and workers' compensation insurance procurement behind is practical and relatively free of pit-falls. But for the construction industry, when you begin to  peel back the layers, you will find many potential coverage issues and that ticking sound. If  you are a contractor using employee leasing to obtain workers’ compensation or maybe you are using subcontractors that obtain their workers’ comp from this type of arrangement. In either case, please continue reading.

Under such an arrangement there may be some savings to be had and you cannot argue with the convenience of having your workers’ compensation premium payments tied directly to your actual payroll each pay period. But, please do not rest on your laurels with the assumption that there are not any trade-offs for that convenience. The fact is, there are….. Big trade-offs that can put you out of business financially unless you have prepared for and covered the two major gaps this arrangement creates.

The vast majority of workers’ compensation policies insuring the Leasing company and the “leased contractor employees” leave an exposure to a workers’ compensation claim if an uninsured subcontractor is hired or if there are employees hired outside of the leasing contract (temporary workers, etc.) For employees to be covered, they must be listed on the policy / contract with the leasing entity. And  with the specific exclusion of employees of subcontractors these policies contain, forces you to either have an additional standalone policy (on an “if any basis”) or precludes you from ever using a subcontractor (you cannot cover gaps in their coverage) and from never having an employee on the job that is not listed on your policy.

We have recently witnessed that “time bomb” go off. A fully insured contractor / owner / builder hired a subcontractor who uses employee leasing for obtaining his workers’ compensation coverage. And while the owner never authorized the subcontractor to utilize ANY sub-subcontractors for this job, he did so anyway. And while in good faith he believed the sub-subcontractor had proper workers’ compensation coverage in place, (the policy or “qualifier” he claimed to be covered under also had coverage through employee leasing and after-the-fact denied that the two employees were part of his company) the fatally injured worker appears to not have any coverage. That leaves the Owner as the “statutory” employer of this worker and his injuries under the law. Fortunately the owner has a conventional policy that could respond not leaving him in financial straits, but the impact on the cost of his policy for the next three years could amount to tens of thousands of dollars of additional premium due to Experience Modification Factor escalation.  Had the owner relied upon employee leasing workers’ compensation coverage, there would be no coverage to respond and would be financially catastrophic.

We understand that for many small contractors especially those newly in business obtaining conventional coverage can leave few alternatives other than the Florida Workers’ Compensation Joint  Underwriting Association (FWCJUA). But even a 30% surcharge for a year or two may be money well spent rather than leaving you open to that financial time-bomb of an uninsured million dollar claim. Think about this very carefully when you accept coverage from a sub with employee leasing coverage or you decide this is the way to go for your coverage.  While there may be ways to attempt to manage this risk, they are not very practical. Those include requiring a daily roster of any employee you allow on your jobsite and a phone call or fax to the carrier providing the coverage for employee leasing. Or, not allowing any subcontractors or sub=subcontractors on the job. But most of us familiar with the construction industry in Florida know that both of these ideas are not practical and on a busy construction project you never know who is working for whom. I have seen more than once a phantom employee pointing to another contractor on the job claiming they are their employee for the purpose of filing a work related claim. And don’t forget that once a worker files a Petition for Benefits (PFB) against your company, that “claim” will not just go away until it goes fully through the entire process of  PFB filing, mandated mediation and setting for final hearing. All of those steps in the process require covered legal representation and expense.

While many industries outside of construction (where subcontracting and a tough labor market are the rule rather than the exception), obtaining workers’ compensation through employee leasing may not have any real pitfalls and no ticking time bomb. But, for those of you in the construction industry, your agent will need to put in the extra effort and provide expertise “you can count on©  and provide you with “business peace of mind©  when it comes time to evaluate and place your workers’ compensation coverage.

Our recommendation: Even if you have coverage afforded by a leasing arrangement, procure your own stand alone workers' compensation policy form any available source. It is the only way to fill the gaps in coverage for uninsured statutory employees.